Long-Term Care: What Are the Real Risks?

My post last Monday -- Should You Buy Long-Term Care Insurance -- kicked off a series of posts on this important topic. This post helps you assess the likelihood that you'll incur high costs for long-term care.

For some time, insurance companies selling long-term care insurance have cited statistics like these:

Two-thirds of people aged 65 and over will need long-term care in their lifetime.

A stay in a nursing home can cost over $70,000 per year.

While these alarming statements may be true, they tell an incomplete story.

The first statistic may include stays at skilled nursing facilities that are covered by Medicare, for instance, or they can include people who receive care from friends and families -- both of which would significantly reduce one's out-of-pocket requirements. And not everybody who needs long-term care will have a lengthy stay in a nursing home that costs $70,000 per year. So while two-thirds of people may need long-term care at some point in their lifetime, not all of them will have trouble paying for it.

42 percent of people turning age 65 will have no private out-of-pocket costs for long-term care over their lifetime.

19 percent of those turning 65 will have out-of-pocket costs under $10,000 over their lifetime.

8 percent will have costs between $10,000 and $25,000.

14 percent will have costs from $25,000 to $100,000.

11 percent will have costs over their lifetime from $100,000 to $250,000.

5 percent will have costs of $250,000 or more.

A few notes about these statistics: The above amounts are discounted present values - in other words, they estimate how much you'd need in the bank at age 65 to cover projected long-term care expenses over your entire lifetime. Also, cost estimates would certainly have increased somewhat since 2005. Finally, costs can vary widely by state, as I'll cover in future posts.

Let's dig a little deeper on assessing the threat of ruinous long-term care bills. What are the odds you'll need long-term care in your lifetime, and for how long? The report cited above estimates that for people turning age 65 in 2005, 69 percent of this group will need some form of long-term care over their lifetime, for three years on average. Of this period, 1.9 years will be provided at home, with 1.1 years provided at any type of formal facility. Looking at the most expensive facilities - nursing homes and assisted living facilities - nine percent of this group will need care for two to five years, and eight percent will need care for more than five years.

The above estimates tell us that most people will be able to afford to pay for long-term care services, possibly with some modest hardship. However, there is a small group of people who could have very high long-term care expenses. For example, the study cited above estimates that 5 percent of the post-age 65 population will have long-term care expenses of $250,000 or more. This illustrates the classic need for insurance -- an event that has a low chance of occurring and is somewhat unpredictable, but with high costs if the event occurs.

Let's get back to assessing the financial threat. Different circumstances call for different solutions. For example, people with substantial financial resources most likely can self-insure by paying for long-term care expenses out-of-pocket. For this purpose, I suggest that you consider "substantial assets" to be over $1 million for an individual, and over $2 million for a couple. One exception to this guideline: If your goal is to pass along all your assets to your heirs, you might want to buy long-term care insurance so that your assets aren't depleted by long-term care expenses.

On the other end of the spectrum, people with low income and minimal assets can't afford to pay for long-term care insurance premiums, and they can't pay much out-of-pocket for long-term care expenses, either. These people will need to rely on friends and family or government assistance.

This leaves the vast middle and upper-middle class, where the threat of long-term care expenses is greatest. Given the prevalence of unhealthy lifestyles, coupled with the geographic separation of family members, millions of older Americans are vulnerable to the threat of high long-term care expenses.

That's the bad news. The good news is that you have a few strategies for dealing with the threat of high long-term care expenses, including, but not limited to, buying long-term care insurance.

As part of my continuing series on long-term care, my post next Monday will summarize various ways to obtain long-term care services and their costs. Subsequent posts will summarize strategies for addressing the threat of long-term care expenses, and I'll make use of the study cited above to help guide you to the strategy that might work best for you.

Two of my favorite expressions are particularly apt for the threat of long-term care expenses:

Worry is not preparation, and

Hope is not a good strategy.

Whatever your circumstances, go beyond worrying and hoping, and do something to protect yourself and your loved ones from this threat!

View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.